How Netflix’s elimination of its ‘Basic’ plan will help it compete in advertising

The change could significantly impact Netflix’s advertising business – and, ultimately, bolster its market share.

The ‘Basic’ plan, also removed in Canada last month, gave users access to ad-free Netflix on one screen at 720p quality and came at a monthly cost of $9.99 in the US and £6.99 in the UK. The company clarified on its website that existing users on the plan can keep the deal, but newcomers won’t be given the ‘Basic’ plan option.

This means that all new subscribers in the US and UK markets will be forced to either select an ad-supported plan with fewer available programs or one of two more expensive ad-free options with up to four supported devices.

Experts say the decision to funnel users to one of these options reflects broader marketplace changes. For one, viewership habits suggest consumers are increasingly open to adopting cheaper, ad-supported streaming plans, says Darrick Li, vice-president of sales for North America media owners at media planning and buying platform Guideline. The reasons behind this trend are multifold, but economic uncertainty could be a key driver.

“While consumers today continue to nix subscriptions to mitigate platform fatigue and economic pressures, they are now also leveraging ad-supported offerings to watch popular shows without stretching funds,” Li says. “This is direct evidence that consumers have and always will accept advertising-supported media in exchange for great content.”

Some suggest that another factor in Netflix’s decision may be Hollywood’s ongoing writers’ and actors’ strike, which has put new pressure on studios, networks and streaming platforms.

“With the strike going on, streaming services can no longer rely on their original content and need to, at the very least, keep their current subscribers and double down on money-making initiatives,” says Britt Augenfeld, vice-president of advanced TV and video at digital media company Captify. “It looks like Netflix took this as an opportunity to change its model once again. By having an ad-only tier for net new subscribers, it is focusing on increased revenue per customer or household while preventing customers from canceling and coming back when their infamous shows are back in action, post-strike.”

In any case, Netflix is looking to capitalize on current market conditions to drive up its ad revenue. And it’s a savvy business move, some experts say. “Netflix has figured out that ads monetize better than subscriptions below certain price points. It makes complete sense to give their customer the widest library of content they can and do that profitability to pay for it. Entertainment consumers intuitively understand that because they’ve gotten free content for years on major TV networks,” says Mark Douglas, president and chief executive officer at connected television (CTV) advertising firm Mntn.

While Netflix saw success in raising prices in past years, the company’s more recent efforts to do so – and to stem the spread of password-sharing – were met with backlash. “That’s why bringing in ads to increase revenue per subscriber is a path to drive incremental revenue,” adds Douglas. “They can make so much money – and do it faster – by becoming a big player in the ad industry instead of squeezing a $2 price increase.” In his estimation, Netflix is now positioned to enjoy “an era of increased earnings … when a lot of people were predicting the opposite.”

And analysts’ estimates reflect Douglas’ assessment. Ross Benes, a senior analyst at Insider’s eMarketer specializing in TV and digital video, explains: “We forecast Netflix US ad revenues will be $770m this year and $1.07bn next year. While that is a small portion of total US CTV plus TV dollars, Netflix is just getting started. Its viewership rivals any company’s, which means it holds significant ad revenue potential.”

Benes says that most Netflix users will continue to pay for ad-free plans, meaning that Netflix’s bottom line will, for the near term, still be driven primarily by subscriptions rather than ads. However, it’s clear to him that “Netflix is increasingly emphasizing advertising.”

The company’s decision to nix the cheapest ad-free offering points to a larger trend in the streaming and television industries: the movement toward combined ad-supported and ad-free models. It’s a trend that gives consumers more choice while diversifying providers’ revenue streams and supporting growth.

As Mntn’s Douglas puts it: “Free ad-supported plans are needed because most consumers don’t want to pay for more than three or four subscriptions. But the pure ad-supported plans won’t have as many new shows and that’s a tradeoff that most consumers don’t seem ready to make. They want the new shows that create cultural moments like Game of Thrones, Squid Game or The Handmaid’s Tale, and they want something interesting every time they turn on the TV. Ad-supported plus subscription services are the most likely to provide the big content libraries needed to deliver both.”

As it stands, Netflix has acquired some 1.5 million US users on its ad-supported tier, the company recently shared with advertisers. The number represents just a small sliver of Netflix’s total subscriber base – and pales in comparison with competitors’ ad businesses. Hulu, for example, has around 30 million subscribers on its ad-supported plan.

So, it’s clear that Netflix has work to do to build up its advertising business. But many experts are confident that it’s both dominant enough and adaptable enough to do so.

“Netflix has been one of the few companies that has changed and evolved its business multiple times to account for ‘the times,’ if you will,” says Captify’s Augenfeld. “Moving from a DVD by mail service to being the first streaming platform to watch existing content and, in the last few years, adding … its own original content, Netflix is not afraid to change. I expect Netflix to keep evolving to recognize consumer demand and to always focus on profits, retention and growth.

And the odds of success are not bad, owing in part to the continued growth of ad spend in streaming. May data from Guideline indicates that ad spend in digital video is up 18% year-over-year (YoY). And a portion of that spend is most certainly going to the king of streaming.

“This [decision from Netflix] exemplifies how much value lies in TV advertising and continues to support the value of brands spending in TV advertising. No matter how a household watches TV – linear or connected – TV is key to reaching a consumer and advertising is key to any network or provider.”

For more, sign up for The Drum’s daily newsletter here.